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How Can I Fund a Business Purchase?

Here are some practical ways:

  • Traditional loans obtained through local banks.
  • Enhancements to loans from SBA and other sources.
  • Creating a self-directed IRA account to get capital for your business.

Coming back out of the depths of the recession there is no question that bankers have been forced to be more conservative than they used to be back in the mid-2000s. But they all have money they need to put to work, so are receptive to well thought out acquisition plans.

Additionally there are “credit enhancements” available to bankers and other funding sources available to buyers who find a good business proposition. The most popular and well known are the government SBA guarantee programs, the 7(a) business loan guarantee and the 504 program loans for real estate and heavy equipment. These programs are used by most small bankers to enhance the creditworthiness of small business acquisitions, and there are “non-bank” funding sources designed to specifically function in the SBA guarantee space. The SBA guaranteed loan process is much simpler than it used to be, and unless dealing with contaminated properties or other special situations the process is fast and relatively simple. Most banks we deal with are preferred lenders, so they mainly approve the smaller loans and tell the SBA about them. Also for small purchases less than $350,000 there is an express loan program that is fast and simple. 

Then there are USDA programs available in rural areas, and in NH there are a number of really effective and supportive regional development groups that provide coverage for loans that support development and enhance employment. We have worked with most of them and in several cases they have made it possible to make purchases that would not have been possible without their participation.

Another method available to many people who have worked in companies where they have accumulated substantial 401K funds is the use of the funds rolled over into in a self-directed 401K fund to purchase a business. These accounts have to be carefully set up and managed by a professional group that understands and complies with the documentation requirements, but give a buyer the opportunity to make a tax and penalty free and debt free purchase of a business using their own resources, and establish a fund that can grow with the progress of the business to be worth a lot more over time.

The literature about starting businesses is full of stories about people using credit cards and friends and family funds to get started and grow to the level where investors will support them. Another theme consists of stories about the frustration of dealing with banks that disagree about the credit worthiness of the business buyers are trying to buy and how expensive the process of getting a loan can be.

The bottom line – if you are thinking about buying a business talk to us and talk to your local banker, there are probably ways to do it if you have a reasonable down payment.

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